In part one we covered the basic role of the freight broker and as an agent, the basics of what makes up the process, and what it takes to be an agent. In this installment we’ll be talking about financing, operations, expenses, and income.
Or, Did you know that a broker is also a banker?
As shocking as this may be, it’s not unusual for a broker to need a credit line somewhere between $250,000 and $500,000 to pay carriers before being paid by shippers. If you don’t pay trucks in a timely manner they will not haul any freight for you, and obviously if you have nobody to haul your freight, you don’t have a business. As an agent, the most important thing you can do is to make sure the broker you are working with has a solid financial foundation, sufficient insurance, and proper licensing.
On the flip side of this point, it is a strong indicator that a broker may not be meeting those requirements in financial security if haulers start giving you unusually high quotes, don’t return your calls or e-mails, and/or just refuse to haul your freight. It usually means they are not getting paid by your broker.
Operations and Expenses
Freight brokering is conceptually pretty simple: The shipper (or consignor, as they are sometimes called) contacts you with a load. You complete your own internal paperwork and check with your carriers to see who can haul it. If you already have a relationship with a carrier, you send them an addendum to your basic contract that describes the particular load and the rate. If the carrier agrees, the company’s representative signs the document and sends it back. (If you don’t already have a relationship, you’ll need to set up an agreement before you finalize the deal on the first shipment.)
Next, they dispatch a driver. It is recommended to require that the driver call you to confirm that the load has been picked up, and again when it’s been delivered. There are technologies available in the industry that allow agents to track loads online as well.
After the shipment has been delivered, the carrier will send you an invoice and the original bill of lading. You invoice your customer, pay the trucker and then, repeat the process for every shipment.
The Code of Federal Regulations is highly specific about the types of records you must maintain. While as an agent, you may keep a master list of shippers and favorite carriers to avoid repeating the information, your Broker is required to keep a record of each transaction. Each record must show:
- the name and address of the shipper;
- the name, address and registration number of the originating carrier;
- the bill of lading or freight bill number;
- the amount of compensation received by the broker for the service performed, as well as the name of the payer;
- a description of any non-brokerage services performed in connection with every shipment, or other activity, the amount of compensation received for the service, and the name of the payer; and
- the amount of any freight charges collected by the broker and the date of payment to the carrier.
These records are kept for a period of three years, and each party to a particular transaction has a right to review the records relating to that transaction.
One of the most appealing aspects of being an agent for a freight brokerage business is that your physical startup requirements are relatively small.
Unlike a carrier or freight forwarder, you don’t need a truck, warehouse or loading dock. Your customers aren’t likely to come to your location, so you don’t need to worry about an impressive reception area or elegant offices. In fact, while there are some definite advantages to a commercial location, an agent can easily operate from a home office or even a spare bedroom in their home.
Where you operate depends on your resources and goals for your company.
Many agents start from home with the goal of moving into commercial space as soon as they’re established with a few clients. This varies between agents and it is a great goal if that is important to you.
The major benefit of being a home based agent is the fact that it significantly reduces the amount of startup and operating capital you’ll need. But there’s more to consider than simply the upfront cash you’ll need. Do you have a separate room for an office, or will you have to work at the dining room table? Can you set up a comfortable workstation with all the tools and equipment you’ll need? Can you separate your work area from the rest of the house so you can have privacy when you’re working-as well as get away from “the office” when you’re not?
By contrast, starting in a commercial location requires more initial cash than starting from home. If you decide to do this, your range of options is fairly broad, and your choice should be guided largely by the goals you’ve set for your business in terms of market and growth. Consider office buildings, light industrial parks and executive suites.
Unless you have an extremely large home, you’ll find that a commercial location allows you to create a setup that’s more efficient and practical than what you might be able to do in a spare bedroom.
Pricing & Income
Freight charges are based on a number of variables, but the main factors are the weight of the load, the amount of trailer space that will be required and the distance it must travel.
Rates are also affected by the type of truck needed (flatbed, van, refrigerated, RGN, etc.), whether the driver needs to make one or more stops to pick up the freight, and whether the driver needs to make more than one stop to deliver the goods. A shipment will be entitled to one pickup and one delivery with no extra charge; additional stops can usually be negotiated with the carrier and will likely depend on their market potential to get their next load.
Before you begin shopping for rates for specific shipments, always get an idea of the current “going rates” for the types of shipments you’re likely to be handling. This can be done by requesting rates from several carriers and studying them.
Your income is generated by the commissions you earn on each load. The “margin” is the difference between what the shipper pays the brokerage and what the brokerage pays the carrier, also known as gross profit. An agent typically earns a percentage of the margin and varies by brokerage. A typical brokerage offers their independent agents between 50% or 60% of the margin, some even more with high volume.
Determining how much of a “margin” should be added is not always a straightforward process. Many see pricing as a “black art” based on many factors such as the freight’s origin and destination, commodity type, and analyzing the market environment such as “are there alternative loads for the truck to chose from”, or “are there many trucks in the area that are competing for your load”.
Another significant factor is determining how “price sensitive” your shippers may be. Ultimately, the agent’s role is to aggregate all of this information and determine what the market will bare. A typical margin can range between 10 and 15 percent of the shipping charges, sometimes higher depending on the type of freight.
Keep in mind that your commission is your gross revenue, and out of that you must pay your overhead: rent, taxes, payroll, sub-agent sales commissions, utilities, debts and so on.
Our final part of this series will cover marketing and resources and any questions that you ask in the next several days. Please send your questions to Joey @ [email protected]. Looking forward to some active dialogue.